Losing out on Compound Interest by not rolling over TSP?

[Mike1209]

Hello everyone!

I am 37 years old and I will be retiring from military service in a few years and have been looking at making the decision to roll over my TSP or not after I retire. I have been reading as much as I can about the benefits of leaving it in VS rolling it over to an IRA or 401K, however I have not been able to find any information or conversations about the compound interest perspective.


I plan to have around $250,000 in my TSP when I retire. From what I understand, I can leave the money in the TSP, where it will continue to grow, however I cannot contribute. Let's say I don't roll it over and start to contribute to an IRA with my new employer, where my account will essentially be starting from scratch. Let's say the market returns an average of 7% going forward.


Wouldn't I want to rollover all of my TSP into that 401K so I can maximize my gains with my monthly contributions plus the compound interest that would be earned on a quarter million VS what I would gain with those same contributions using the new IRA/401K account?


Am I looking at it wrong?

 

[James48843]

The TSP will be offering additional “Mutual fund window” investment opportunities in a year or two. No reason right now to move out of TSP- let’s find out the options that will be coming soon.
P.S.- TSP existing funds roll dividends into the share price, so you are not missing that by staying in the TSP (your compound interest statement).


Sent from my iPhone using TSP Talk Forums

 

[Bullitt]

Wait and see what your new employer has to offer before making any decisions on transferring TSP. Fees will be the biggest drag on your returns and TSP has the lowest fees out there. Many company sponsored IRA/401k plans have different fee structures than the funds offered to the public. If the fees are over .5% I'd just leave it in TSP.

Look at your multiple accounts as one portfolio. You can have taxable, non-taxable, tax deferred accounts, but the accounts should be looked at as a one.

 

[Mike1209]

James48843,

Thanks for the response. I will look into the mutual fund window options that will be offered. Regarding the compound interest, I understand that dividend funds are rolled into the share price.

Perhaps I don't understand compound interest as much as I thought I did. My logic in the example that I gave was that the 7% compounded return that I would receive on the 250K + my additional contributions (if I rolled everything over) would be greater than if I left the 250K in the TSP and earned 7% on my contributions in a new IRA with no initial balance, hence starting from scratch. However, looking at it further, 7% is 7% right, no matter what amount is actually being compounded?

I hope I made some sense there.

 

[Boghie]

Mike,

You can move the TSP assets to your new employers 401(k) or to a Traditional IRA (Self Directed) or just leave it there. Money is money. All of them will give you the option of reinvesting dividends and gains. All of them are tax advantaged...

However, both Bullitt and James bring up valuable points:

• You will NOT beat the fee structure of TSP. I should never say never. Maybe if you put it in a very low fee Vanguard self directed IRA you might beat the TSP fee structure. Maybe. What will destroy your long term balance are taxes and fees. You have the tax issue beat (till someone raises the income tax after you retire), but fees will eat into your return. Even a 2% fee will have a dramatic affect on your balance. It will not look like much quarter over quarter or year over year, but over time it will be huge. Do whatever you can to keep the fees low.
• And, as James mentioned, you may have some very nice options in TSP in a year or two. Since there is no benefit to moving the money (excepting that you will have LOTS of investing options in a self directed IRA) why not wait.

Finally, to be absolutely clear on the compound interest thing. C/S/I assets do not have interest. They have growth and dividends. TSP flips the switch and reinvests the dividends which is probably what you mean by compounding. Maybe you mean growth on growth. If that is the case, it simply doesn't matter where the assets are - all that matters is how they are invested. If you are 100% in the TSP C Fund with $200K and you are 100% in an S&P500 ETF with $200K inside a new 401(k) or self directed IRA than they will compound and grow equally - given that the fees are the same and you check the box to reinvest gains and dividends with the IRA. I'm kinda anal about the 'interest' thang. Interest implies highly reliable, safe interest payments over a specified time - think mortgages and bank interest. Unless the rug is completely pulled out you WILL earn that 3.25% interest if you hold a mortgage bond. You WILL earn that 0.1% interest on the $2 million in your bank account. However, you are entitled and guaranteed exactly nothing in equities. In fact, you often lose money. It is not interest. It is compounding growth - which is what equites do over long periods of time.

On the other hand, the G Fund growth IS interest. Some slugs in Congress determine the interest rate and they WILL give it to you - guaranteed by their promise.

The F Fund return is largely interest, but if the interest rates change than the current value of previously purchased bonds change. So, it is a mix. If you held the bonds in your grubby little hands it WOULD be guaranteed interest.

 

[flalaw97]

James48843,

the 7% compounded return that I would receive on the 250K + my additional contributions (if I rolled everything over) would be greater than if I left the 250K in the TSP and earned 7% on my contributions in a new IRA with no initial balance, hence starting from scratch. However, looking at it further, 7% is 7% right, no matter what amount is actually being compounded?

I think you figured it out - 7% is 7% regardless of whether it is all in one pile or multiple piles. The better question is have you invested your $250K and the new contributions in a way that makes the most sense for your situation? In other words minimizing risk and optimizing return given when you will need that money. I am not sure where you got the 7% number but at your age (37) you likely have quite some time before you will need/be eligible to start drawing from your TSP or 401K so you should be invested aggressively since you have lots of time to recover from a dip. As Boghie, Bullitt and James stated, you are "compounding" by reinvesting any dividends. But at your stage I think it is more important that you are invested in equities (C, S, I) rather than say bonds and income funds (G, F, L income). My two cents.